<PAGE>
Interactive Objects, Inc. Form 10-QSB
Three Months Ended September 30, 2000
U.S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] Quarterly report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarterly and nine-month period ended September 30,
2000.
[ ] Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from ____________ to
________________
INTERACTIVE OBJECTS, INC.
(Exact name of small business issuer as specified in its charter)
Commission file number: 0-25373
WASHINGTON 87-0434226
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
12600 SE 38th Street, Suite 150
Bellevue, WA 98006
(Address of principal executive offices)
(425) 653-5505
(Issuer's telephone number)
___________________
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: As of September 30, 2000, the
Registrant had 14,900,702 shares of Common Stock outstanding.
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT (check one): Yes [ ] No [X]
1
<PAGE>
ITEM 1: FINANCIAL STATEMENTS.
INTERACTIVE OBJECTS, INC.
CONSOLIDATED BALANCE SHEETS
September 30, 2000 and December 31, 1999
<TABLE>
<CAPTION>
ASSETS
September 30, 2000 December 31, 1999
(Unaudited) (Audited)
------------------ -----------------
<S> <C> <C>
Current Assets
Cash $ 755,344 $ 1,922,392
Certificates of deposit 114,466 110,743
Accounts receivable 141,006 174,935
Prepaid expenses 127,032 67,994
----------- -----------
Total current assets 1,137,848 2,276,064
Furniture and Equipment, at cost,
less accumulated depreciation
of 285,795 and 202,344 352,084 371,042
Other assets
Deposits 17,161 17,161
----------- -----------
$ 1,507,093 $ 2,664,267
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 318,132 $ 330,873
Accrued expenses 93,698 148,134
Unearned revenue 59,113
Notes Payable 61,000
----------- -----------
Total current liabilities 411,830 599,120
Stockholders' Equity
Common Stock 149,007 146,169
Additional paid-in capital 8,476,870 8,126,950
Retained deficit (7,530,614) (6,207,972)
----------- -----------
1,095,263 2,065,147
----------- -----------
$ 1,507,093 $ 2,664,267
=========== ===========
</TABLE>
See accompanying notes to financial statements.
2
<PAGE>
INTERACTIVE OBJECTS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three and Nine Months Ended September 30, 2000 and 1999
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30, September 30, September 30,
2000 1999 2000 1999
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues
Service and sales $ 224,691 $ 883,175 $ 673,031 $2,669,101
Expenses
Labor and benefits 395,759 583,789 1,261,291 2,268,530
Selling, general and administrative 200,330 246,218 782,285 983,944
---------- ---------- ----------- ----------
596,089 830,007 2,043,576 3,252,474
---------- ---------- ----------- ----------
Income (loss) from operations (371,398) 53,168 (1,370,545) (538,373)
Interest Income 11,546 21,463 47,903 67,368
---------- ---------- ----------- ----------
Net income (Loss) $ (359,852) $ 74,631 $(1,322,642) $ (516,005)
========== ========== =========== ==========
Basic earnings (loss) per share of
common stock $ (0.02) $ 0.01 $ (0.09) $ (0.03)
========== ========== =========== ==========
Diluted earnings (loss) per share
of common stock $ (0.02) $ 0.01 $ (0.09) $ (0.03)
========== ========== =========== ==========
Weighted average number of
common shares outstanding -
basic 14,804,778 14,616,952 14,701,875 14,881,421
========== ========== =========== ==========
Weighted average number of common
shares outstanding - diluted 14,804,778 15,210,102 14,701,875 14,881,421
========== ========== =========== ==========
</TABLE>
See accompanying notes to financial statements.
3
<PAGE>
INTERACTIVE OBJECTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30, 2000 and 1999
<TABLE>
<CAPTION>
September 30, 2000 September 30, 1999
(Unaudited) (Unaudited)
<S> <C> <C>
Cash Flows From Operating Activities
Net Loss $(1,322,642) $ (516,005)
Adjustments to reconcile net loss to net
cash flows from operating activities
Depreciation 83,451 74,683
Changes in operating assets and liabilities
Accounts receivable 33,929 (218,698)
Prepaid expenses and other (62,761) 41,047
Accounts payable (12,741) 108,969
Accrued expenses (54,436) (229,250)
Unearned revenue (59,113) 5,184
------------ ------------
Cash flow from operating activities (1,394,313) (734,070)
Cash Flows from Investing Activities
Purchase of equipment (64,493) (127,365)
------------ ------------
Cash flows from investing activities (64,493) (127,365)
Cash Flows from Financing Activities
Issuance of stock 352,758
Redemption of stock (475,000)
Payments on notes payable (61,000) (32,666)
Cash Flows from financing activities 291,758 (507,666)
------------ ------------
Net (decrease) in cash (1,167,048) (1,369,101)
Cash, beginning of period 1,922,392 3,346,535
------------ ------------
Cash, end of period $ 755,344 $ 1,977,434
============ ============
</TABLE>
See accompanying notes to financial statements.
4
<PAGE>
INTERACTIVE OBJECTS, INC.
Notes To Unaudited Consolidated Financial Statements
Note 1. Basis of Presentation.
The accompanying unaudited consolidated financial statements have been prepared
in accordance with the instructions to Form 10-QSB and therefore do not include
all disclosures necessary for a fair presentation of financial position, results
of operations, and cash flows in conformity with generally accepted accounting
principles. The unaudited consolidated financial statements include the accounts
of Interactive Objects, Inc. ("Interactive Objects") and its wholly owned
subsidiary Avatar Interactive, Inc. Significant intercompany transactions have
been eliminated in the accompanying unaudited consolidated financial statements.
The operating results for interim periods are unaudited and are not necessarily
an indication of the results to be expected for the full fiscal year. In the
opinion of management, the financial statements reflect all adjustments
(consisting only of normal recurring adjustments) which are necessary for a fair
presentation of operating results.
Note 2. Per Share Information
Basic earnings per share is computed by dividing income available to common
shareholders by the weighted average number of common shares outstanding in the
period. Diluted earnings per share takes into consideration common shares
outstanding (computed under basic earnings per share) and potentially dilutive
common shares. Except for the three months ended September 30, 1999, employee
stock options outstanding have not been reflected as exercised for the purposes
of computing diluted earnings or loss per share since the exercise of such
options would be antidilutive. Also, except for the period noted above, stock
purchase warrants outstanding have not been reflected as exercised since the
exercise of such warrants would be antidilutive.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
INTERACTIVE OBJECTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION
Statement of Forward-Looking Information
This discussion and analysis should be read together with our condensed
financial statements and related notes appearing in Item 1, above. This report
contains both objective historical information and subjective "forward-looking
statements" that are subject to the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995, and bear certain risks and
uncertainties that could cause actual results to differ materially from those
projected. Generally, forward-looking statements are prefaced by the words:
"believe," "expect," "intend," "anticipate," and similar expressions; but their
absence does not mean that a statement is not forward-looking. Numerous factors
both within and outside our control could affect our actual results, including
but not limited to the factors set forth in the "Risk Factors," and "Business"
5
<PAGE>
contained in our Amended Annual Report on Form 10-KSB/A for the year ended
December 31, 1999. These risk factors, among others, could cause results to
differ materially from those presently anticipated by us. Readers are cautioned
not to place undue reliance on these forward-looking statements, which speak
only as of the date of this report. We undertake no obligation to publicly
release the results of any revisions to these forward-looking statements that
may be made to reflect events or circumstances after the date of this report or
to reflect the occurrence of anticipated events.
General
Interactive Objects, Inc. was founded in 1995 by several former Microsoft
employees. Today, Interactive Objects (iObjects) is a leading designer of
embedded software and hardware solutions for digital audio appliances. iObjects
is the creator of the Dadio(TM) digital audio operating system and the
Dharma(TM) digital audio reference design. iObjects' technology is featured in
products such as Iomega's (NYSE:IOM) HipZip(TM) digital audio player and
Microsoft's (NASDAQ:MSFT) Pocket PC(TM) Media Player. iObjects provides software
engineering, hardware design, and manufacturing services, and offers licenses of
its proprietary Dadio operating system and Dharma reference design to leading
consumer electronics, PC manufacturers, and computer software companies.
During the quarter ending September 30, 2000, iObjects shipped the first
commercial version of its Dadio OS with Iomega's HipZip(TM) digital audio
player. Using Dadio, the HipZip provides skip-free, CD-quality sound in a sleek,
compact design and supports key music file formats such as mp3 and Microsoft's
WMA. The HipZip also doubles as a PocketZip(TM) storage device, so you can
download and transport spreadsheets, images and more. iObjects also announced an
agreement with Red Hat, Inc. (NASDAQ:RHAT) to enable the development of a family
of new digital audio playback devices based on the Dadio OS. The agreement
provides a single solution for OEMs seeking entry into the rapidly growing
market for digital audio playback devices. As part of the alliance, the
companies also announced plans to co-develop a new Dadio system development kit
(SDK) for OEMs that greatly simplifies the design, development and manufacturing
process of digital audio players.
On July 10, 2000, iObjects named Dennis Tevlin, a former Microsoft
executive, as its new President. Tevlin has since been named President and CEO
succeeding Steve Wollach. Wollach remains an advisor to the company. While at
Microsoft from 1992 until 1999, Tevlin held several senior positions including
General Manager of MSN and Director of Marketing for Microsoft Office. Prior to
Microsoft, Tevlin held various marketing and business development positions with
ITT Information Systems and Alcatel NV. Tevlin holds an MBA from Cornell
University and a BA from the University of Oregon. The company also promoted
Mark Phillips to CTO and Senior Vice President of Research and Development and
Tim Davis to Vice President of Program Management.
6
<PAGE>
Shift to Product-Based Business Model
Throughout this year, iObjects has gradually transitioned itself from a
consulting services business to a product business designed to derive a
recurring revenue stream from royalty licensing agreements. With the successful
introduction of its Dadio OS and the subsequent commercial availability of
Iomega's HipZip digital audio player, iObjects fully completed this transition.
Moving forward, the company will be focused mainly on the development and
licensing of its Dadio OS and Dharma platforms. In addition to the royalty
licensing revenue derived from Dadio and Dharma, iObjects also derives revenue
from providing R&D and custom engineering for producing prototypes,
demonstration products, and concept designs. iObjects also derives revenue from
providing on-going support and development services on a retainer basis to key
customers.
As a result of the transition, the company's Information Appliances Group
product line is now the principal focus of the company. Operations of its
Business Objects and of its Avatar Consulting Group were significantly reduced.
Products and Services
For the quarter ended September 30, 2000, our reportable revenues were
derived principally from the company's information appliances division,
reflecting our increased focus in this area. The division's main product during
this period, Dadio, is a digital audio operating system for embedded devices.
Revenues for the quarter came from engineering design work done in the
production of the HipZip and WinJam digital audio players which are both based
on the Dadio OS. Because the HipZip shipped at the very end of September 2000,
royalty revenue from this product was immaterial for the quarter.
Dadio supports the most popular audio codecs including mp3, Microsoft WMA,
Dolby AAC, Audible and Ogg Vorbis, and will manage large play lists of up to
6,000 hours or 100,000 songs. Dadio also integrates digital rights management
(DRM) capabilities, supporting both Microsoft's Windows Media(TM) and
InterTrust's Rights/PD(TM) DRM software for embedded systems.
The company has recently introduced a second key product - Dharma(TM).
Dharma is an all-new hardware platform for digital audio that enables the
development of a family of products based on a common, interoperable design.
These products include portable digital audio players, Internet radios, digital
audio receivers, digital home jukebox systems and digital car stereos. Dharma is
a multi-purpose development platform that enables the creation of a full line of
compatible products. Dharma standardizes the key hardware and software
interfaces of a digital audio reference design so that core modules can be
swapped in and out interchangeably.
We anticipate investing additional resources towards developing our digital
audio platform throughout the remainder of fiscal 2000.
7
<PAGE>
Results of Operation - Three and Nine Months Ended September 30, 2000 Compared
to Same Period in 1999
Revenues. Revenues for the three-month periods ended September 30, 1999
and September 30, 2000 decreased by 75.0% from $833,175 to $224,691,
respectively. Revenues for the nine months ended September 30, 1999 and
September 30, 2000 decreased by 74.8% from $2,669,101 to $673,031, respectively.
During the three and nine month periods ended September 30, 2000, our revenue
was generated principally by the information appliances division. The decrease
in gross revenue during the three and nine months periods ending September 30,
2000, compared to the same period in the prior year is attributable primarily to
a decrease in consulting services.
Labor and Benefits Expenses. This category comprises all internal labor
costs including: salaries, taxes, employee benefits, and all other direct costs
related to Company performance, including project specific independent
contractor fees, labor costs, supplies and other miscellaneous related expenses.
Our labor and benefits expenses for the three-month period ended September 30,
1999 and September 30, 2000 decreased by 32.0% from $583,789 to $395,759,
respectively. During the nine months ended September 30, 1999 and September 30,
2000, our labor and benefits expenses decreased by 44.4% from $2,268,530 to
$1,261,291, respectively. The decrease in labor and benefits expenses from the
third quarter and the first nine months of 1999 compared to the same period in
2000 was directly attributable the decrease in consulting services and contract
labor for those services.
At September 30, 2000, we had 12 employees working in our software
consulting services and product development department, 2 employees in our sales
and marketing department, and 2 employees in our general and administrative
department. We also retain and expect to continue hiring, on a case-by-case
basis, independent contractors to augment our consulting and project-service
capabilities. Generally, we hire independent contractors within 90 days of the
intended project. We expect to hire additional staff, as needed, to meet the
demands of both current and prospective clients.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the three-month periods ended September 30, 1999 and
September 30, 2000 decreased by 18.6% from $246,218 to $200,330, respectively.
In each period, these expenses consisted primarily of employee recruiting,
travel, professional fees, occupancy costs, telephone and related Internet
connectivity fees, computer network costs, office expenses and supplies,
marketing, advertising and new business development costs. This decrease was due
to an decrease in administrative staff. Our expenses in this category were equal
to 89.2% of our gross revenue for the three-month period ended September 30,
2000, as compared to 27.8% for the same period in 1999. The increase as a
percentage of gross revenue was due to the decrease in consulting revenue and
the increase in new product development costs.
Selling, general and administrative expenses for the nine months ended
September 30, 1999 and September 30, 2000 decreased by 20.5% from $983,944 to
$782,285, respectively. This decrease was due to decreased staffing, investment
in infrastructure and associated expenses, partially offset by increased new
product development costs. Our expenses in this category was equal to 116.2% of
our gross revenue for the nine months ended September 30, 2000, as compared to
36.9% for the same period in 1999. The increase as a percentage of revenue
reflected reduced consulting revenue, and increased new product development
costs.
8
<PAGE>
We believe that our selling, general and administrative expenses will
increase in dollar amount for the remainder of fiscal 2000 as a result of an
anticipated expansion of our administrative staff required to support its
growing operations.
Interest Income. Interest income for the three-month period ended
September 30, 1999 and September 30, 2000 decreased by 46.2% from $21,463 to
$11,546, respectively. This decrease is primarily due to lower available cash
balances due to the use of funds for working capital purposes. Interest Income.
Interest income for the nine months ended September 30, 1999 and September 30,
2000 decreased by 28.9% from $67,368 to $47,903, respectively.
Net Loss. Interactive Objects recognized a net loss for the three-month
period ended September 30, 2000 of $359,852 compared to a net gain of $74,631
for the same period in 1999. The Company recognized a net loss of $1,322,642 for
the nine-month period ended September 30, 2000, as compared with a net loss of
$516,005 for the same period in 1999. Net loss as a percentage of gross revenue
was 160.2% as compared with a 8.5% increase in income as a percentage of gross
revenue for the same period in 1999. The net loss as a percentage of gross
revenue was 196.5% for the nine months ended September 30, 2000, as compared to
a net loss as a percentage of revenue of 19.3% for the same period in 1999. This
increase in net loss as a percentage of gross revenue was due primarily to an
increase in new product development costs.
Liquidity and Capital Resources. At September 30, 2000, we had working
capital of 1,549,678 compared with working capital of $2,044,690 at September
30, 1999. At September 30, 2000, we had cash and cash equivalents of $869,810 as
compared to $2,086,977 for the same period in 1999. In the first nine months of
2000, total cash used in operating activities was $1,394,313, which was
primarily due to operating expenses. During the first nine months of 1999, total
cash used in operating activities was $734,070 which was primarily due to the
Company's net loss for the period, partially offset by unearned revenue. During
the first nine months of 1999 and 2000, investing activities used net cash of
$127,365 and $64,493 respectively, to purchase equipment. During the first nine
months of 1999, total cash used in financing activities was $507,666, which
represents redemption of stock and payments on notes payable. In the nine months
ended September 30, 2000, the Company generated cash of $291,758 from the sale
of common stock, net of payments on notes payable.
Based on our current proposed plans and assumptions relating to product
releases and sales, we anticipate that we may require additional capital
financing in the future. We have no current arrangements to secure additional
financing. However, we cannot guarantee that any additional financing will be
available to us when needed, or on commercially reasonable terms.
Miscellaneous Accounting Information
Statement of Financial Standards No. 133 ("SFAS 133"), "Accounting for
Derivative Instruments and Hedging Activities" established accounting and
reporting standards for
9
<PAGE>
derivative instruments and for hedging activities. SFAS 133 has no impact on our
financial statements because we do not currently engage in any derivatives or
hedging activities.
Statement of Financial Standards No. 134, "Accounting for Mortgage-Backed
Securities Retained after the Securitization of Mortgage Loans Held for Sale by
a Mortgage Banking Enterprise" does not apply to us.
Year 2000 Compliance
To date our systems and software have not experienced any material
disruption due to the onset of the Year 2000. As discussed in prior filings, we
undertook certain planning and implementation efforts. However, we cannot assure
that we will not experience disruptions in the future as a consequence of the
Year 2000 bug. We cannot quantify the amount of our potential exposure, but do
not believe it to be material.
10
<PAGE>
PART II--OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities and Use of Proceeds
None.
Item 3. Defaults upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
27.1 Financial Data Schedule.
(b) Reports on Form 8-K.
None.
11
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
INTERACTIVE OBJECTS, INC.
Dated: November 10, 2000 By: /s/ Dennis J. Tevlin
----------------------------
Dennis J. Tevlin
President and Chief Executive Officer
12
